Two leading Japanese politicians, Prime Minister Kiichi Miyazawa
and Speaker of the House Yoshio Sakurauchi have caused a firestorm
by questioning the quality and work ethic of America's workers and
this country's ability to compete in the world. But doubts about
America are not confined to foreigners. Not too long ago, some American
leaders warned that the country is at risk of a future of flipping
hamburgers and sweeping up around Japanese computers.

Fortunately, the evidence is strong that those who are bearish
about America's future are wrong about both the past and the future.
But the pessimism about America is so widespread that talk of protectionism
and a retreat from active involvement in international economic
and political affairs is again fashionable. The facts suggest that
those seeking a truly effective industrial policy should actually
favor active American promotion of rapid worldwide economic growth
in the context of free trade.

Research by Andrew Warner of Harvard University and the Federal
Reserve shows that, contrary to popular belief, America's advantage
is in the production of high-technology capital goods, and that
this advantage has been growing. A key reason for the recent boom
in exports has been the rapid rise of worldwide spending on capital
goods.

Industrial giant

Back in the late 1960s, when by all accounts the United States was
the world's industrial giant, manufacturing amounted to about 22
percent of real gross domestic product (GDP). Much of this manufacturing
went into defense and the production of consumer goods from shirts
to automobiles. Only 28 percent of the manufacturing base was devoted
to capital goods such as computers, aircraft and industrial machinery,
and only 20 percent of American capital goods were exported. The
total value of U.S. capital-goods exports was just 1.4 percent of
GDP.

Today, when some assert that the United States has lost its manufacturing
base, manufacturing output has risen to 23 percent of real GDP.
The share of the manufacturing base devoted to capital goods has
risen to 38 percent. This capital-goods boom has been made possible
by exports: About 45 percent of capital goods output is now sold
abroad, more than double the proportion of the late 1960s. Capital-goods
exports now amount to 4 percent of GDP.

Contrary to the pessimists' view, a major part of this improvement
occurred during the 1980s, and particularly the late 1980s. During
the 1980s, the growth in real exports amounted to one-fifth of the
real growth of the economy. Inflation-adjusted growth in exports
of capital goods outpaced overall growth by better than two to one.
Since 1986, the story is even more striking. Nearly half of America's
real economic growth over the past five years has been in exports.

Also contrary to the pessimists' claims, U.S. exports have become
less based on farm and other primary goods and more focused on high
technology. Capital equipment has risen to 41 percent of U.S. exports
from 30 percent in the late 1960s, largely as a result of the worldwide
investment boom: As other countries develop their economies, they
purchase increasing amounts of American-made machines, computers
and airplanes.

During the pasts two decades, the investment share of world product
has risen to 26 percent from 22 percent. In dollar terms, gross
world investment outside the United States in 1992 will be roughly
$5 trillion.

We should hope that this process continues, not only for humanitarian
reasons, but also to benefit the American economy. Each 1 percent
in world investment spending produces a 1.5 percent increase in
exports of capital goods, and almost a full point increase in total
merchandise exports. Strikingly, not only does the relationship
between worldwide investment and U.S. exports pass traditional statistical
tests easily, the relationship stands up to a wide variety of mathematical
and statistical specifications. In fact, the link between U.S. exports
and worldwide investment shows some signs of having strengthened
in recent years.

It is interesting to contrast the U.S. performance with that of
Japan. There is no evidence of a statistical relationship between
Japanese exports and world investment spending over the past quarter
century. There does appear to be some improvement over time for
Japan, although this improving trend does not pass statistical muster.
Further, even at its highest, the sensitivity of Japanese exports
to worldwide investment spending remained below America's.

One reason for the popularity of the pessimists' view is that
America's strengths are not apparent in goods that consumers normally
buy. To see them, one has to visit factories, construction sites
and airport hangars--not your usual tourist stops.

The regional composition of investment also appears to be shifting
in America's favor. Latin America as a whole and Mexico in particular
are increasing their pace of investment. During 1989, the United
States exported twice as many capital goods to Latin America as
did Japan. The other area of potential investment in the years ahead
is the former communist bloc, which could become a staggering source
of future growth of U.S. capital-goods exports.

The most urgent message of this analysis is that encouraging faster
worldwide economic development might be the single most effective
policy for promoting the growth of exports. The export-promotion
policy that many suggest as an alternative to freer trade is a reduction
in the exchange value of the dollar. This has three potential drawbacks.
First, it's not clear that a country's monetary authorities can
control the value of their currency. Second, if foreign-exchange
markets perceive that devaluation is an intended policy of the U.S.
government, interest rates in assets denominated in dollars might
rise to offset the exchange-rate loss. Third, devaluation would
reduce Americans' purchasing power and standard of living.

Recent history provides a good test of the relative efficacy of
worldwide investment and exchange-rate depreciation. The late 1980s
were a period not only of rapidly growing worldwide investment spending,
but also of real dollar depreciation. During the five years following
the Plaza Accord of 1985, the dollar fell 38 percent on a trade-weighted
basis. Worldwide investment spending rose 38 percent over the same
period.

Over those five years, total U.S. merchandise exports rose $192
billion in inflation-adjusted terms. $106 billion of the additional
merchandise exports, or 55 percent, was statistically associated
with the rise of global investment.

Common-sense ideas

Let there be no mistake: Neither America nor any other country can
expect to enjoy an economic free ride. Americans should continue
their efforts to reform the nation's schools, increase the investment
rate, encourage the natural entrepreneurship of the population and
subject government spending and regulation to rigorous cost-benefit
tests. But these are common-sense ideas that we would be well advised
to undertake regardless of the international trading situation.

There may be some advantage in having Mr. Miyazawa and his countrymen
think that America is in decline. It probably pays to be underestimated.
But we would be foolish to underestimate ourselves. World economic
trends are moving our way and we do not need to be protected from
them. If anything, we need to reinforce them and to increase our
exposure to them. The best industrial policy for America to pursue
is active involvement in the world's affairs to promote global economic
development and free trade.